PHILADELPHIA/NEW YORK (Reuters) - Diversified insurer
Liberty Mutual Group said on Wednesday it would buy Safeco Corp
<SAF.N> for $6.2 billion in a deal that would make Liberty
Mutual the fifth-largest U.S. property and casualty insurer.

Each share of Safeco will be exchanged for $68.25 cash,
nearly a 51 percent premium to Safeco's closing stock price of
$45.23 on Tuesday. Safeco shares jumped 45.7 percent, or
$20.69, to $65.92 in afternoon trading on the New York Stock
Exchange.

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Safeco, which provides insurance for individuals and for
small- and mid-sized businesses, would become part of Liberty
Mutual's agency markets business unit. Combined, the
organization would have about 15,000 independent agencies.

"They are very strong West of the Mississippi and we are
very strong east of the Mississippi and have an international
presence, as well," Kelly said.

Liberty Mutual is the sixth-largest property and casualty
insurer in the United States, based on its 2007 direct written
premium of $20.2 billion. Safeco had 2007 direct written
premium of $5.9 billion.

The deal follows Liberty Mutual's acquisition of Ohio
Casualty last year. Liberty Mutual said it would continue to
look at other acquisition opportunities.

Liberty Mutual and Safeco started weighing a deal about six
months ago, after Liberty Mutual initiated discussions, Kelly
said.

"We have a publicly espoused position of being acquisitive.
We want to be a consolidator," Kelly said. "We will make sure
this integration goes smoothly and well, but over time, we will
be looking at other acquisitions."

HIGH PREMIUM

Safeco had been seen as a potential acquisition target for
several years, but "deteriorating underwriting in its core auto
insurance book caused some investors to question just how much
an acquirer would pay," said Sandler O'Neill analyst Paul
Newsome.

"We are surprised at how much Liberty Mutual was willing to
pay," Newsome said.

Before the stock jumped on Wednesday, Safeco's shares
traded at about 7.5 times earnings, below the sector's median
multiple of 10.2 times earnings.

Kelly said Liberty Mutual was paying roughly 10-times
earnings for Safeco, which was within the sector's typical
range of takeover premiums of roughly 9- to 11-times earnings.

"It's not difficult to expect a more capable insurance
management team would be able to extract more value from Safeco
than the current leadership has been able to," said Meyer
Shields, a principal at Stifel, Nicolaus and Co Inc.

"Some of the premium is in recognition of the fact that
once all the dust settles -- and that's more than 12 months
away -- Liberty Mutual should be able to do more with what
Safeco was," Shields said.

MORE CONSOLIDATION EXPECTED

Analysts expect property and casualty insurers in North
America to become more acquisitive this year as the slowing
economy makes other forms of growth more difficult.

The scarce growth prospects, but strong balance sheets will
likely lead to other deals, according to Cliff Gallant, an
analyst at Keefe, Bruyette & Woods, who called the transaction
a great deal for Safeco.

Safeco is scheduled to report first-quarter earnings on
April 30. In the fourth quarter, Safeco's net income fell by
nearly a third because of competition in auto insurance and
losses from California wildfires.

The company had been facing increasing competition from
rival car insurers such as Progressive Corp <PGR.N> , which had
been dropping prices to gain market share.

"The deal moves Liberty's personal lines market share up a
bit, but we believe Allstate and Progressive can still outsmart
it," said Stifel's Shields.

Safeco was advised by Morgan Stanley & Co, while Liberty
Mutual was advised by Lehman Brothers.

(Reporting by Jessica Hall in Philadelphia, and Paritosh
Bansal in New York; editing by Steve Orlofsky/Andre Grenon)